Will The Norwegian Krone Appreciate With Rising Oil Prices?

May 23, 2018 10:31 AM ETENOR, NORW, UUP, UDN2 Comments
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Discount Fountain
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Summary

  • Oil prices have been rising significantly.
  • However, the Norwegian krone may have limited upside.
  • Interest rates continue to rise at a faster pace in the United States.
  • Moreover, Norway is dependent on a weak krone to facilitate export-led growth.

Oil prices have risen significantly to $71 at the time of writing, and it is speculated that the commodity could even break $100 by this time next year.

As an oil-producing nation, does the Norwegian Krone stand to appreciate significantly as a result?

We see that the NOK is still trading well below levels prior to 2016 against the greenback but has seen a slight appreciation in that time.

Since 2016, we see that the krone is up by 13% against the USD, while crude oil prices have risen by over 95%.

Moreover, when we take a look at the period of 2014-15, we see that oil prices dropped by just over 50%, while the NOK depreciated against the USD by just under 23%.

In this regard, we see that there has been a slight positive correlation between oil prices and the movements of the NOK/USD. However, a significant driver of the currency fluctuations is much more likely to be explained by weakness in the U.S. dollar - i.e. higher oil prices mean higher inflation and the greenback depreciates as a result.

Interestingly, we have not been seeing this particular dynamic play out in 2018. We can see that while oil prices have been rising, the NOK has not been seeing any gains against the USD.

As a matter of fact, the greenback is in a unique position in that the currency is continuing to rise in spite of rising oil prices. With interest rates in the U.S. now rising at a faster pace than other developed countries (something we haven’t seen in the last 10 years) - the greenback has become quite an attractive currency in spite of rising oil prices - meaning that the NOK has stayed low relative to this currency.

Looking at Norway itself, interest rates are

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Discount Fountain profile picture
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I am an independent investor with an interest in analyzing stocks across the consumer, finance, telecommunication, and travel sectors. As a data scientist, I also have a great interest in using data tools to better understand a company's financial position.Some examples include:- Aggregating quarterly churn and ARPU data for Deutsche Telekom (DTEGY) and analysing trends over time using SQL: https://seekingalpha.com/article/4516805-deutsche-telekom-growth-potential-remains- Building a Monte Carlo simulation in Python to analyze loss ratios for Zurich Insurance Group (ZURVY): https://seekingalpha.com/article/4459821-zurich-insurance-stock-solid-insurance-company-still-faces-risks- Examining ADR and RevPAR trends by brand for Hilton Worldwide Holdings (HLT) using SQL: https://seekingalpha.com/article/4517248-hilton-worldwide-holdings-an-analysis-of-adr-and-revpar-trendsDisclaimer: All of the author's articles are written on an "as is" basis and without warranty. They represent the author's opinion only and in no way constitute professional investment advice. It is the responsibility of the reader to conduct their due diligence and seek investment advice from a licensed professional before making any investment decisions. The author disclaims all liability for any actions taken based on the information contained in any articles published.

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